Speaking at this year’s British Bankers Association Conference in London, FSA chairman Turner played down the alleged rifts between the FSA, the Treasury and the Bank of England, but did admit changes have to be made to the framework of the UK regulators.
He said: “Clearly at some time we will need to think through how the new activity of macro-prudential analysis and regulation would work effectively if we assume that the existing institutional responsibilities remain unchanged, and it is important to have a rational a debate as possible about any alternative arrangements proposed.
“That debate needs to focus on what will work best, not on any considerations of institutional ambition or defensiveness.”
Turner admitted that both the FSA and the Bank have to work on their relationship and said in the past the relationship was lacking. He said: “It is clear that there needs to be a very close relationship between central banking activities and the regulation and supervision of banks.”
But the FSA chairman reignited the debate as to which arm of the tripartite will have the most power over the banking sector. He used the examples of Spain and Canada, where the central banks do not oversee the banking sector. He said: “There is an argument in favour of locating the supervision of banks within the central bank. However, it is clearly not essential to do it in order to ensure effectiveness.”
He warned that taking more power from the regulator may have adverse affects across the industry. For example, he said that separating bank supervision from insurance supervision creates the danger that an institution like AIG can inhabit “a regulatory no man’s land”. He also warned that by separating conduct supervision from prudential supervision consumer protection could be adversely affected.
Turner said: “We have not been fully effective in the past in achieving close working relationships across institutional divides. In future, alongside more intense supervision, and more effective regulation, we need a commitment to build deeper working relationships between whatever are the different institutions involved in the full spectrum of activities from macro-prudential regulation through to consumer protection.”
Turner also called for further debate surrounding the future legal and regulatory ramifications of banks’ retail and wholesale arms. He argued against separating ‘narrow’ banking from investment banking, rather proposing that the arms be legally separated.
He said: “There could be a role for defining more clearly the separate legal entities in which core retail banking functions and investment banking type functions are performed, making it clear to the market that in any future crisis there is at least the possibility that rescue might apply only to retail banking operations.”